What a night on the markets. The London Stock Exchange goes “down” for three hours due to a technical glitch, and once trading resumed it finished the day “down” more than 3%.
Ouch!
On top of that Dubai kindly let everyone know that it’s in a spot of bother. You can imagine the conversation:
“Er, you know all that cash we borrowed to build those fancy pants buildings, well, there’s a glitch, ha, ha, ha. Any chance of extending the repayment deadline? We’re still good for it Guv, honest!”
And the Aussie market is taking a pasting this morning too. All I can say is I’m glad we recently recommended to Australian Small Cap Investigator and Australian Wealth Gameplan subscribers that they start using trailing stop orders.
Of course the market could still bounce from here if investors put their rose tinted glasses back on again, but it’s all about managing risk and being comfortable with the risk you’re taking.
Anyway, there’s not much more commentary we can add to the stock market today, so we won’t even try.
In fact, it’s not even the stock market we should be looking at – not directly anyway. It’s the banking sector and by extension, the property market that’s the real key to this.
Look, we’re no expert on Dubai. And we’re not an expert on Dubai property.
Actually, we’re not even an expert on the Australian property market either. But we do know a massive real estate debt bubble when we see one.
In fact, one thing we can see from the Dubai debt meltdown is a parallel with the Australian property market. Not that the property spruikers here will see any parallel. They’ll continue to claim the Australian property market is different.
And that Australian property prices will keep going up and double every 7-10 years.
Well, we’ll let them carry on with that argument while we laugh from the sidelines.
But let’s take a look at the basics of what’s happened with Dubai…
In a nutshell they had all these projects they wanted to build. You’ve probably seen the photos of all the lovely shiny high-rise buildings and especially the Dubai World project that had apparently attracted rich and famous buyers from Hollywood.
Trouble is, these building projects don’t ask for all the cash up front from buyers. When the rich and famous buy the $5 million property in Dubai World they’re naturally not going to hand over the cash up front.
They’ll hand it over in stages or at the end of construction, just like they do here.
So the builders have to get financing from somewhere in order to build and finish the project and then pay back the financing once the rich and famous hand over the cash.
That financing is of course debt. It’s bonds issued by the company to investors with the promise to repay the debt in the future.
Well, how do you think the Australian property market is funded?
Now, the property spruikers will trumpet the tired line that Australia hasn’t had the massive overbuild of properties that they’ve had in Dubai and the United States.
Because here we have a “property shortage.”
Clearly the property spruikers haven’t paid a visit to the Gold Coast or Melbourne’s Docklands and Southbank recently.
If they had they’ll have noticed the glut of high rise apartment buildings.
Anyway, we thought we’d do some snap research on Melbourne’s Docklands and Southbank suburbs. The research revealed some quite interesting stats. Make of them what you will.
But to me it hardly points towards a safe and sustainable property market. Anyway, make your own mind up.
According to the 2006 Census there were a total of 2,671 properties being rented in Southbank and 1,413 in Docklands.
For Docklands that represented 64.5% of all residential properties in the suburb, and 54.8% of all properties in Southbank.
That probably doesn’t sound too disturbing, but let’s take a closer look.
A quick search on the property website www.domain.com.au reveals there are 209 available rentals for Southbank and 90 available for Docklands. In other words, it puts to bed the claim about a tight rental market.
Supposedly the rental vacancy rate is only about 2%, well according to these numbers it’s 7.8% for Southbank and 6.3% for Docklands.
That’s hardly what you’d call a rental crisis.
But that’s not the half of it. And this is where we return to the matter of debt, and how the Australian market is inextricably linked to it.
In these two hotbeds of leveraged rental properties, in Docklands only 5.6% of the dwellings are fully owned owner occupied. 11.9% are being purchased with a mortgage and we dare say the vast majority of the 64.5% rental homes are also funded by debt.
As for Southbank the numbers are only slightly better, with 12% fully owned, but still there are 16.3% with mortgages and of course the majority of the 54.8% of rental properties would be hocked to the eyeballs.
Again it puts to bed the lie that only 30% of households have a mortgage. Funnily enough they always conveniently forget the mortgages held against super leveraged investment properties.
In the case of these two suburbs it’s more like 60-70% of homes that are mortgaged.
All that debt has to be funded from somewhere, and it sure isn’t from the suckers who put their hard earned cash into ‘savings’ accounts thinking that the bank will take care of it for them.
Because don’t forget that Australian banks’ exposure to residential mortgages is around 50% of their ‘assets.’ And much of the funding for those mortgages (the liabilities on a bank balance sheet) comes from issuing bonds to overseas investors.
The disaster for the banking sector would be if those funds started to dry up. After the hit investors have taken on US and European property, and now middle eastern property, can we really expect investors to risk getting bitten a third time?
Think about it, if you’re an investor in a shiny office in Frankfurt, Los Angeles or Madrid, would you really be keen to throw a whole bunch of money towards a property market that is at its peak?
Will they heck as like!
At the very least they’ll want the government to guarantee those bonds, so expect the taxpayer to be put on the hook again as the leveraged debt binge ramps up even further.
But even that can’t last forever.
We’ve warned for some time that the global economy and the Australian economy aren’t as rosy as the pollies and central bankers and mainstream commentators would have you believe.
The side effects of the burgeoning debt around the world were always going to blow the top off many economies at some time.
Is this the moment? Who knows, we don’t that for sure. So all you can do is take educated guesses and make sure you’re prepared for the worst.
Or you can just forget about it and follow the advice of Michael Pascoe and Peter Switzer and leverage yourself up to the ‘miracle’ Australian economy.
Good luck with that!
Cheers.
Kris.
60-Second Market Round Up
by Shae Smith
The S&P/ASX200 finished the day lower by 13 point to 4,708.60 despite the strong in the morning. Around the world last night saw big falls on the international markets due to the Dubai Debt story. As a result the Aussie market has dropped dramatically this morning.
The US market was closed yesterday due to the American Thanksgiving holiday.
In the UK, the FTSE100 took the Dubai news badly, losing a massive 170 points or 3.25%, closing to 5,194.13. The London Stock Exchange had to suspend trading mid morning due to technical problems.
The Nikkei ended in the red, closing to 9,383.24, down by 58 points.
The price of spot gold in Australian dollars is trading at $1,306.20, while in US Dollars it is trading at $1,192.28.
The price of silver in Aussie dollars is $20.44 and in US Dollars it is $18.66.
The Aussie dollar versus the US dollar is trading at USD$0.9135, and against the Japanese Yen JPY79.08
Crude oil closed at USD$76.23
For the biggest movers on the market yesterday click here…
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GB – Wages increase with productivity, not inflation. Use your maths skills and do some calculations on productivity increases.
GB – “new home sales falling for the second month in a row”
NEW HOMES – not total homes. And an underproduction of new homes creates undersupply, and that creates higher PR_ C_ S.
Go on fill in the blanks.
GB – I do not follow you, but it would be good to pin this scenario down. We want to find out whether one could be better off over a 15 year period where there was no capital gains for a 500k investment property, as opposed to sticking one’s available savings into a bank account and earning interest on it. Are you happy with these assumptions then:
1. Buy a house with, 100k down and borrowing an additional 400k.
2. Sell it after 15 years for the same price, 500k.
3. Inflation during that time runs at 5% pa, and wages more or less keep up with it.
4. As an income producing investment property, the house brings in 5% ROI in the initial year and is adjusted upwards in subsequent years in line with the CPI, which, say, runs at 3% per annum, which would be a whole 2% less than the real rate of inflation and nominal wage growth we are assuming, giving a real deal for the tenant, whose accommodation will be getting cheaper relative to their income every year.
Based on these assumptions, we want to find out whether an investor would be better off putting their 100k in savings into a property as described, as opposed to simply keeping it in the bank and earning 5% interest on it per annum.
Can you do the two sets of calculations and see which option would be better, and by how much? For the sake of completeness, assume that the house is paid off with the rent and from current income during that 15 year period in the one case, and that the same amount of cash is put aside into the bank account by the saver. They both pay taxes, of course, on any interest earned, as that is part of the investment landscape.
PF – people ask for an increase in salary as a minimum of inflation, the cost of living increases by 2% then they want a 2% pay rise
cb – dont worry about it, as i mentioned property bulls are oblivious to the loan side of the argument.
GB – Wait. I am not sure what you mean by the loan side of the argument, but it could be what I was hoping to clarify and demonstrate. And, namely, that in an inflationary environment, the rationality of purchasing a real asset (gold, property, whatever) by means of debt increases in proportion to the expected rate of inflation going forward. That is why I suggested that we assume the house price to stay constrant for 15 years, and then I was hoping to show to you that the 5% annual inflation would dutifully chew up the value of the debt over those years, giving you an unseen, but very much real and tax free benefit.
Anyhow, I am pretty sure that if you compute all those variables into your model, the investor with leverage will come out way ahead of the saver, who simply keeps his savings in cash. And that, even in an environment, that his savings keep pace with inflation, which is a rather generous assumption to make, because in reality banks will never compensate savers for lending them their money in line with the real rate of inflation, as this is the way governments and bankers steal money from savers.
HEATHENS !!!!!!!!!!!!!!!!!!!!
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